Bill Addresses Issues with Church Retirement Plans

Senators Ben Cardin (D-Maryland) and Rob Portman (R-Ohio), members of the Senate Finance Committee, have introduced the Church Plan Clarification Act of 2013 (S. 952) to help resolve what they term as “an unfortunate application of our current pension rules on church pension beneficiaries.”

Most church retirement plans are exempt from the Employee Retirement Income Security Act of 1974 (ERISA) and are instead subject to special laws and regulations that reflect the distinctive issues that these plans and churches confront. Church retirement plans are subject to stringent state and federal laws and Church Alliance regulations, including state fiduciary standards, state contract law, and Internal Revenue Code tax requirements. (The Church Alliance is a coalition of the chief executive officers of 37 church benefit programs.) Church retirement plans ensure the stability of participants’ investments by applying many of the same safeguards applied to corporate and public pension funds.

“Dedicating your life to serving a church, synagogue or other religious entity should not be an impediment to retirement,” said Cardin. “Many so-called ‘church plans’ date back to the 18th century. While their unique structures have been recognized by the law, our modern, complicated tax system hasn’t always been accommodating.”

Some recent legislative and regulatory changes have resulted in uncertainty or compliance issues for these church pension plans. As summarized by the Church Alliance, a group in support of the bill, the Church Plan Clarification Act of 2013 contains corrections and clarifications to a series of issues impacting church retirement plans such as:

Controlled Group Rules. Currently, the controlled group rules for tax-exempt employers may require certain church-affiliated employers to be included in one controlled group (i.e., treated as a single employer), even though they have little relation to one another. A modification is necessary to the controlled group rules to ensure that multiple church-affiliated entities—which may be related theologically, but have little or no relation to one another in terms of day-to-day operation—are not inappropriately treated as a single employer under the tax code.

Grandfathered Defined Benefit (DB) Plans. IRC Section 403(b) church DB plans established before 1982 are called grandfathered DB plans and were intended to be treated and continue to operate as DB plans. However, recent rules subjecting such plans to both DB and defined contribution (DC) annual benefit accrual limitations under IRC Section 415 have resulted in clergy who are lower-paid and closest to retirement being harmed. A clarification is required to ensure that only the DB limitations apply to these plans.

Automatic Enrollment. Church employers often cross state lines. State wage withholding laws differ from state to state, presenting barriers to offering automatic enrollment into church retirement plans. Federal legislation is needed to preempt these laws so that church retirement plans can include auto-enrollment features in their retirement plans just as non-church corporate plans are allowed to do without the uncertainty arising under the laws of certain states.

Transfers Between 403(b) and 401(a) Plans. Current rules do not allow transfers and mergers between an IRC Section 403(b) church retirement plan and an IRC Section 401(a) qualified church retirement plan. Legislation is needed to provide for such transfers and mergers, providing a better alternative to terminating or having to maintain separate legacy plans. Such legislation will also decrease complexity and administrative costs for church employers, as well as confusion for employees.

81-100 Trusts. Church benefits boards are legally allowed to commingle plan and non-plan church-related assets for investment purposes to allow churches the benefit of the board’s greater resources, investment skills, and economies of scale. A clarification is required to ensure that a widely used investment vehicle, 81-100 (2011-1) trusts, can accept such funds.